Question

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Inner Secret T Shirt Company produces and sells one product. The following information pertains to each of the company’s first three years of operations:

         

Variable costs per unit:     

Manufacturing:     

Direct materials   $   27

Direct labor   $   15

Variable manufacturing overhead   $   5

Variable selling and administrative   $   3

Fixed costs per year:     

Fixed manufacturing overhead   $   600,000

Fixed selling and administrative expenses   $   170,000

During its first year of operations, O’Brien produced 97,000 units and sold 73,000 units. During its second year of operations, it produced 79,000 units and sold 98,000 units. In its third year, O’Brien produced 89,000 units and sold 84,000 units. The selling price of the company’s product is $73 per unit.

Required:

1. Assume the company uses variable costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

2. Assume the company uses variable costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

3. Assume the company uses absorption costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

4. Assume the company uses absorption costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

Answer 1

Req 1:
Compute the Variable costing Unit Product cost
				Year 1	Year 2	Year 3
Direct Material				27	27	27
Direct labour				15	15	15
Variable Manufacturing overheads				5	5	5
Variable costing unit prroduct cost				47	47	47
Construct The Variable Costing Income Statement under FIFO
				YEAR 1		YEAR 2		Year 3
Sales					5,329,000		7,154,000		6,132,000
Less: Variable cost
variable cost of goods sold				3,431,000		4,606,000		3,948,000
Variable selling expense				365,000	3,796,000	490,000	5,096,000	420,000	4,368,000
Contribution margin					1,533,000		2,058,000		1,764,000
Fixed expense:
Fixed Manufacturing overheads					600,000		600,000		600,000
Fixed selling expense					170,000		170,000		170,000
Net operating Income					763,000		1,288,000		994,000
Req 2
Construct The Absorption Costing Unit Product Cost
				Year 1	Year 2	Year 3
Direct Material				27	27	27
Direct labour				15	15	15
Variable Manufacturing overheads				5	5	5
Fixed Manufacturing overheads				6.19	7.59	6.74
Absorption costing unit prroduct cost				53.19	54.59	53.74
Construct the Absorption Costing Income Statement Under FIFO
				Year 1	Year 2	Year 3
Sales				$5,329,000	$7,154,000	6132000
Cost of Goods sold				3882870	5316220	4518410
Gross Margin				$1,446,130	$1,837,780	1613590
Selling and distribution expense				535,000	660,000	590000
Net operating income				911,130	1,177,780	1023590
Req 3:
Compute the Variable costing Unit Product cost
				Year 1	Year 2	Year 3
Direct Material				27	27	27
Direct labour				15	15	15
Variable Manufacturing overheads				5	5	5
Variable costing unit prroduct cost				47	47	47
Construct The Variable Costing Income Statement under LIFO
				YEAR 1		YEAR 2		Year 3
Sales					5,329,000		7,154,000		6,132,000
Less: Variable cost
variable cost of goods sold				3,431,000		4,606,000		3,948,000
Variable selling expense				365,000	3,796,000	490,000	5,096,000	420,000	4,368,000
Contribution margin					1,533,000		2,058,000		1,764,000
Fixed expense:
Fixed Manufacturing overheads					600,000		600,000		600,000
Fixed selling expense					170,000		170,000		170,000
Net operating Income					763,000		1,288,000		994,000
Req 4:
Construct The Absorption Costing Unit Product Cost
				Year 1	Year 2	Year 3
Direct Material				27	27	27
Direct labour				15	15	15
Variable Manufacturing overheads				5	5	5
Fixed Manufacturing overheads				6.19	7.59	6.74
Absorption costing unit prroduct cost				53.19	54.59	53.74
Construct the Absorption Costing Income Statement Under LIFO
				Year 1	Year 2	Year 3
Sales				$5,329,000	$7,154,000	6132000
Cost of Goods sold				3882870	5323220	4514160
Gross Margin				$1,446,130	$1,830,780	1617840
Selling and distribution expense				535,000	660,000	590000
Net operating income				911,130	1,170,780	1027840